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Riders are provisions you can add to an annuity to ensure the contract meets your financial needs. These additions will increase the cost of your annuity, but depending on your reason for purchasing the annuity, may be the best solution for you.
In addition to a variety of annuity types, you can choose from a long list of contract additions, known as riders, that may help you ensure that your annuity contract is suited to your financial requirements, your comfort with risks and even your medical condition.
For example, you might want the option of leaving all or part of your annuity contract to a selected beneficiary. Or you might want your annuity payout to increase with inflation. Other options would provide extra income in the event that you require long-term health care.
Many of these riders are designed to offset some of the disadvantages you may see in owning an annuity. But they add to the complexity and the cost. This can make annuities seem overwhelming. Understanding your options can help you decide what’s best for you.
The Cost of Annuity Riders
You should exercise caution when choosing annuity riders because these additional features almost always come at a cost. That cost can be significant and recurring, and will likely reduce the amount of income you receive from your annuity in retirement. The more riders on your contract, the higher your costs and the lower the amount of your income stream.
Riders can be expensive, adding as much as 1 percent or more to the annual cost of the annuity. The actual percentage will depend on several variables, including the provisions of the rider and the company that provides it. Make sure you have a clear understanding of the ongoing costs of any riders or contract features you consider adding to your annuity.
To ensure that you are clear about any potential costs, write down your understanding of the contract and the costs and ask your agent to review it with you and sign what you both agree to.
Life and Death Benefits
The main categories of annuity riders are living and death benefits. Living benefits refer to income received by the original annuity purchaser. Death benefits refer to funds relayed to the estate or beneficiaries.
Guaranteed Minimum Living Benefits
These are typically provided with variable annuity and indexed annuity contracts to guarantee the level of benefits received by the purchaser, no matter how the annuity’s investment portfolio or index performs. The point of this is to offset the risks inherent in types of annuities in which the payout amounts can rise or fall depending on these portfolios or indexes. According to LIMRA, sales of guaranteed living benefit riders totaled $10.4 billion in the first quarter of 2018 alone. When variable annuities are purchased through brokers and dealers, 85 percent of purchasers elect to add one of these riders.
- Guaranteed lifetime withdrawal benefit or guaranteed minimum withdrawal benefit
- This rider allows annuity owners to withdraw a certain percentage of the original investment each year until they have withdrawn the full amount. The amount of the investment that is still in the annuity will continue to grow. A similar rider, known as a commuted payout rider, provides for lump-sum withdrawals in the first few years for a percentage of the annuity spelled out in the contract.
- Guaranteed minimum accumulation benefit
- Purchased to protect against loss of value because of changes in financial markets, this rider guarantees that the annuity purchaser will receive payouts worth at least the dollar amount of the purchase or some percentage of the dollar amount after a specified number of years.
- Guaranteed minimum income benefit
- As the name suggests, this rider sets a floor on the dollar amounts of your annuity’s payout during your lifetime. The annuity might pay more, but not less than the amount specified in the contract. According to the Insured Retirement Institute, these payments are based on the amount invested, credited with an interest rate —often 4 to 5 percent. The annuity purchaser typically faces a holding period of seven to ten years before this provision can be exercised. There also may be age limits for this rider.
- Standalone lifetime benefit
- This rider is similar to the guaranteed lifetime withdrawal benefit, but it allows for flexibility regarding the types of assets that will be protected.
Guaranteed Minimum Death Benefit
Deferred annuity contracts will often include guaranteed minimum death benefits. This benefit comes into play if the annuity owner dies during the accumulation phase. If this happens, the guaranteed minimum death benefit rider may provide for a new annuitant to be named.
- Contract anniversary value or ratchet
- According to the Insured Retirement Institute, this death benefit increases based on criteria described in the annuity contract. The enhanced death benefits equal the greatest dollar amount of one of the following: contract value at death, the premium payments minus prior withdrawals, or the contract value on a specified previous date. The date could be a prior contract anniversary date.
- Initial purchase payment with interest or rising floor
- The value of this benefit can be either the contract value at death or the premium payments with previous withdrawals subtracted, whichever is greater.
- Enhanced earnings benefit
- Enhanced earnings benefits offset federal income taxes on earnings payable at the time of death.
Riders to Meet Other Needs
There is a seemingly endless menu of annuity riders, and your annuity provider may offer some that are not included here. Most of them address either a health need or a financial change. These are common choices you should be familiar with when deciding what provisions you would like included in your annuity contract.
- Disability income
- Adding a disability rider ensures income if you develop a disability that results in a loss of income. The income from your annuity will be higher for a limited time, such as a year.
- Impaired risk
- Typically purchased by someone with a specific, documented health condition, or risk, that is likely to lead to a shorter life, the impaired risk rider increases the annuity payments to compensate for the projected shorter payout time. Unlike life insurance policies, which often require proof that a purchaser is healthy, these riders require proof that the purchaser is sick.
- Long-term care
As the name suggests, this increasingly popular rider is to cover the cost of long-term care by increasing your payment should you require it. Typically this means your monthly payout will be a multiple of your normal benefit. These riders are available on both fixed and indexed annuities and may have limitations, such as a number of years of care that this benefit will cover.
Another version of this rider waives surrender charges for certain withdrawals made by annuity holders who need long-term care. Under the Pension Protection Act of 2006, long-term care withdrawals are exempt from taxes and penalties otherwise incurred before the age of 59 1/2. About 12 to 15 percent of annuities sold in 2017 had some kind of long-term care benefit.
- Terminal illness
- This rider applies to annuity owners who develop terminal illnesses with a life expectancy of a year or less. With this rider added to a contract, when such a condition is documented, the insurance company will waive surrender charges for withdrawals covered by the contract specifications.
- Cost of living
- This rider can increase the amount of your payments to adjust for inflation. This adjustment can be based on either the rate of inflation or a specified percentage noted in the annuity contract. Usually, the amount that the income can increase will be capped.
- Return of premium
- This rider returns the remaining principle — the original purchase price — to a specified beneficiary if the owner of the annuity dies before the entire principle has been distributed. For example, if someone purchases an annuity with a return of premium rider for $100,000 and dies after collecting $75,000, then an heir would receive $25,000. This rider guarantees that the initial investment will not be lost.
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